And yet, across commodity markets, calm somehow reigns. After several years of double-digit increases, the Bloomberg Commodity index, a benchmark that covers prices of raw materials, fell by more than 10% in 2023 (see graph). Oil prices, at just under $80 a barrel, are down 12% over the past quarter and are therefore well below 2022 levels. European gas prices are hovering near their lowest levels in two years. Grains and metals are also cheap. Experts expect more of the same this year. What, exactly, would it take to shake up markets?
After successive shocks inflamed prices in the early 2020s, markets adjusted. Demand, restrained by suppressed consumption, was relatively curbed. But it is the supply response to increased prices, in the form of increasing output and changing trade flows, that makes the world more shock-resistant today. Investors are relaxed as supply levels for many commodities look better than they have since the late 2010s.
Take oil, for example. In 2023, increased production from countries outside the Organization of the Petroleum Exporting Countries and its allies, a group known as OPEC+, was enough to cover the increase in global demand. This pushed the alliance to cut its output by about 2.2m barrels per day (b/d), an amount equivalent to 2% of global supply, to keep prices stable. However, the market just fell short of a surplus in the last quarter. Kpler, a data firm, is predicting an average oversupply of 550,000 b/d in the first four months of 2024, which would be enough to replenish stocks almost as much as they fell during the hot summer months. New barrels will come from Brazil, Guyana and especially America, where efficiency gains offset a drop in rig count.
In Europe, manic buying since the start of the Russian war and a mild winter have helped keep gas storage at about 90% capacity, well above the five-year average. Assuming normal weather and no major disruptions, they should remain close to 70% full until the end of March, predicts Rystad Energy, a consultancy, easily beating the European Commission’s target of 45% by February 1. Extensive stocks will lower gas prices, not only in Europe but also in Asia, in turn encouraging more coal-to-gas switching in power generation everywhere. This will help lower coal prices already weakened by huge increases in production in China and India.
Mined supply of lithium and nickel is also exploding; that of cobalt, a by-product of copper and nickel production, remains robust, dampening green metal prices. Increased planting of grains and soybeans (outside Ukraine) and clear weather are prompting experts to project record production in 2024-25, following a bumper 2023-24. That will push the average stocks-to-use ratio at food exporters, a key determinant of prices, from 13% to 16%, a level they last saw in 2018-19, says Rabobank, a Dutch lender.
Abundant supply suggests a quiet first half of the year. After that, excesses could taper off. Non-OPEC oil production may level off. Delays at some US liquefaction terminal projects, which were originally scheduled to export in 2024, will set back Europe’s efforts to resupply gas. Low grain prices will crush farmers’ margins, threatening planting. Markets will be more exposed to shocks, of which three stand out: a sharp economic rebound, bad weather and military outbreaks.
Whether major economies avoid recession or not, the pace of global growth is expected to slow, implying modest growth in raw material demand. Inflation is also expected to ebb, so commodities will have less appeal as a financial hedge. But a surprise is not impossible. It looks less likely in China, the usual bellwether of commodity markets, than in America, where interest rates may soon be cut and infrastructure splurging is afoot. Liberum, a bank, calculates that a one-percentage-point increase in its forecast for annual global GDP growth would boost commodity demand by 1.5%.
Freakish weather would have a more profound effect. Europe’s winter is not over yet, as evidenced by the cold that has just begun. A continued freeze could force Europe to use an extra 30 billion cubic meters of gas, or 6-7% of its usual demand, Rystad calculates. That could push the region to compete more aggressively with Asia for supplies. A climate surprise would be more disruptive still in the wheat markets, not least if it affected Russia, the largest exporter, which has had excellent harvests since 2022. The pantry to cover shortages is emptying. With rising consumption poised to break records this season, global wheat supplies are already heading for their lowest levels since 2015-16.
What about war? Four-fifths of Russia’s food exports are ferried across the Black Sea, as is 2m b/d of crude. A naval upset could rattle prices, although rising OPEC+ production, and international pressure to protect food supplies, would calm markets. Red Sea flare-ups, possibly caused by an ongoing US campaign against the Houthis, could cause a 15% increase in the price of oil, says Jorge León de Rystad—though that may not last long either. A war involving Iran and other Gulf states, where most of the unused production capacity today lies, is what would really cause chaos. The potential for dire prices of the kind predicted in March 2022, when barrels at $200 seemed possible, could return.
It would take something extreme – or a mix of less extreme but still unlikely events – to blindside commodity markets. That’s not quite the consolation it seems. They have been blindsided by similarly improbable events several times this decade.
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